$72.50 is Too Much for Heinz

Warren Buffett’s Berkshire Hathaway ($BRKB) has agreed to buy H.J. Heinz ($HNZ) in a deal worth more than $23 billion. The deal calls for HNZ shareholders to get $72.50 per share in cash. That’s a 20% premium to yesterday’s closing price.

I like Heinz. It’s a great consumer staples business: steadily rising sales, earnings and dividends. My concern, however, is the buyout price. I think Buffett is paying far too much for Heinz. Here are the earnings-per-share figures for the last few years: $2.38, $2.63, $2.90, $2.87, $3.08, $3.35. We’re half-way through this fiscal year (which ends in April) and HNZ is on track to earn $3.54 per share, and the Street expects 3.79 per share for next year.

That’s a good trend. Heinz is growing but it really isn’t growing that fast. Over the last nine years, sales have increased from $8.24 billion to $11.65 billion. That’s less than 4% per year.

I understand that the market places a premium on stability of earnings but I have a hard time valuing Heinz at more than $60 per share. And that’s just at fair value. If I were looking to get Heinz at a bargain, I would be more interested in seeing close to $50 per share.

I should point out that Buffett’s part of the deal is quite good. He’s putting up $4.4 billion in equity and buying $8 billion of 9% preferred stock. At the elevated price, the equity will yield 2.84%.

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